What is Remortgaging?

Mortgages & Money

Remortgaging is applying for a new mortgage but with a different lender, while still living in the same home. Circumstances change, and there may be times when you need to raise cash for whatever reason. Due to changing circumstances, your current mortgage may no longer offer you what is best suited to you.

The mechanics of how remortgaging works are straightforward. You apply for and agree to a loan with a new lender. The solicitor, acting on your behalf, receives the funds from them and will pay your previous lender what they are owed, and you receive what is remaining. The remaining portion is the reason for remortgaging: getting access to cash.

There are several reasons why someone would consider remortgaging, such as switching from a residential mortgage to a buy-to-let mortgage if you decide to rent out your home. You may have bought a house with a cash payment but need to get access to the money tied up in the property. Alternatively, your fixed rates on your mortgage have ended and you are now looking for a mortgage with lower interest rates. Another common reason for remortgaging can be that the value of your house has increased, and you want access to that cash, perhaps for reinvesting somewhere else, or because of a family emergency and you need cash quickly.

A remortgaging situation is similar to when taking out the initial loan in that the new lender will follow certain procedures and carry out the same checks. For example, the new lender will conduct their own valuation of the property and check any work done on the property to ensure it has met the required standards. If applicable, they will also want to scrutinize the tenancy agreement.

A closer look at some scenarios in practice will help to illustrate the remortgaging process in action.

Letting out your home

Properties that are rented out to tenants are purchased with buy-to-let mortgages. This is a legal requirement that lenders will check on to see if you are in compliance, failure of which could result in a breach of mortgage terms and a demand for full repayment right away. It may be tempting to think that mortgage lenders won’t care, but, as some have discovered to their dismay, they will. One possible exception is a case where the lender agrees to grant “consent to let” for a limited time. A lot will depend on the individual lender and the reason why you have requested this, such as having to move away for a while due to work commitments.

For the purpose of remortgaging with the intention of letting out the property, the lender will want to assess the rental valuation and will be looking to see if it will cover the mortgage by the required amount, up to about 125%.

Cash purchase

Say you bought a house at an auction and didn’t have enough time to arrange a mortgage because the cash payment is due within 28 days of auction. You may then want to move over to a mortgage and free up the money tied up in the property.

However, you will need to be aware of the “six-month rule” which most lenders operate by. Put simply, before you are eligible to remortgage your property, you must be in ownership of it for at least 6 months before you can apply. If you are remortgaging for the purpose of turning your home into a buy-to-let property, you will have to, therefore, be mindful of the fact that your money will be tied up for about 8 months in total, which includes the application process itself. For some, this won’t be an issue, for others it could be a cause for concern.

Lower interest rates

Once a fixed interest rate period has ended, you may want to shop around for better mortgage deals with lower interest rates and consider remortgaging to make the switch.

To attract mortgage customers, lenders commonly provide favourable interest rates for the first few years or so, but later switch over to their “standard variable rate” (SVR) once this initial period has ended.

Switching to another lender will be advantageous if you can take advantage of their introductory interest rate offer, and it will also give you the opportunity to obtain another fixed rate protection. This may be more tempting in an economic environment of volatile base interest rate fluctuation. The benefit of a fixed interest rate mortgage is the greater certainty of knowing what your monthly expenditures will be.

While all this sounds well and good, you will have to bear in mind that remortgaging also comes with fees which you will have to pay. These include solicitors’ valuation, and brokers’ fees.

Increased value of property

If the value of your house has increased since you bought it, you may want to liquidate that extra cash and use it for something like reinvesting in another property. Property values can rise for different reasons, including that new extension or loft conversion work you have done, or it can be down to rising prices in the housing market.

In this scenario, you could purchase a house with a 75% mortgage and a 25% deposit. You hold onto it until its value has risen and you want to remortgage it and gain access to the extra cash. You then remortgage the house for 75% of its new value and release the extra value in cash. With this option, however, you need to be aware that it will affect your cash flow in that your remortgage payments will then be higher because you have borrowed more money.